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A resounding victory for the administration in the exchange litigation

January 15, 2014 at 1:35 pm

Nicholas Bagley

I wrote yesterday about the pending litigation over the IRS’s decision to make tax credits available on federally operated exchanges, notwithstanding a facially plausible statutory argument that doing so would contravene the ACA. My timing was good: earlier today, Judge Friedman, a district court judge in D.C., released the first opinion reaching the merits of the dispute. It’s a resounding victory for the government.

Friedman’s opinion tracks the analysis I laid out yesterday. He starts with the observation that “the plain language” of the statute, “viewed in isolation, appears to support plaintiffs’ interpretation.” After all, tax credits are linked to health plans purchased on exchanges “established by the State under 1311.” And federally operated exchanges are established by the Secretary of HHS under Section 1321, not 1311.

But Friedman also points out that the statutory text has to be construed in context. Part of that context is the language of section 1321 itself. The judge notes that, when a state fails to establish a workable exchange, the ACA instructs the Secretary to establish “such exchange.” That little word “such” clarifies that an exchange established by the federal government is a 1311 exchange. “In other words,” Friedman says, “if a state will not or cannot establish its own Exchange, the ACA directs the Secretary of HHS to step in and create ‘such Exchange’—that is, by definition under the statute, ‘an American Health Benefit Exchange established under [section 1311].’”

To reinforce the point, Friedman walks through provisions of the ACA that would make little sense if federal tax credits were unavailable on the exchanges. Why would the ACA require federal exchanges to inform the IRS when they give tax credits to people if they’re not allowed to give them tax credits at all? If the challengers were right, the provision would “serve no purpose” and be “superfluous.”

Similarly, the ACA says that only “qualified individuals” can purchase plans on the exchange, but defines “qualified individual” to be someone who “resides in the States that established the exchange.” “If this provision were read literally,” Friedman writes, “no ‘qualified individuals’ would exist in the thirty-four states with federally-facilitated Exchanges. … The federal Exchanges would have no customers, and no purpose.”

Friedman closes by referring to the purpose of the ACA to provide for near-universal coverage. The challengers’ interpretation, he says, “runs counter to this central purpose.” Accepting it “would violate the basic rule of statutory construction that a court must interpret a statute in light of its history and purpose.” At any rate, even if the statute were ambiguous—and Friedman is crystal clear that he doesn’t think it is—the administration’s interpretation, he says, would be upheldas a “permissible construction of the statute.”

All in all, this is a very good day for the government. Where does the case go from here? If the challengers appeal Friedman’s decision to the D.C. Circuit—and they almost certainly will—the court will probably hear the case sometime this fall. I doubt, however, the challengers will have any better luck on appeal. Friedman’s analysis of the statutory text is very convincing—as I explained yesterday, it’s easily the best interpretation of the statute. Plus, it probably doesn’t hurt that Democrats now outnumber Republicans on the circuit court.

After the D.C. Circuit, it’s anyone’s guess whether the Supreme Court will choose to hear the case. Since litigation is pending elsewhere, it’s possible (albeit unlikely, I think) that the circuit courts could split over the proper interpretation of the statute. If they do, the Supreme Court would have to weigh in on the statutory question. Otherwise, my hunch is that the Court will steer clear. It’s already decided one case that threatened to unravel Obamacare. Why decide another?